Hysteresis and Persistent Long-Term Unemployment: Lessons from the Great Depression and World War 2

51 Pages Posted: 8 Mar 2015

See all articles by Gabriel Mathy

Gabriel Mathy

American University - Department of Economics

Date Written: March 6, 2015

Abstract

Long-term unemployment was a problem both during the Great Depression and today. As employers view the long-term unemployed as lower-quality employees, this reduces their prospects for reemployment long after the end of a recession, a phenomenon which has been previously described as ``hysteresis in unemployment''. I find that hysteresis was a significant problem during the Great Depression as the number of long-term unemployed rose, but that the essentially unlimited labor demand during the Second World War provided jobs even to the long-term unemployed. As a result, the hysteresis effect was reversed and labor market conditions in the 1950s resembled those of the 1920s prior to the Depression. The Beveridge Curve has also shifted out during the Great Recession as long-term unemployment has risen. Both of these shifts are also evident during the Great Depression. I provide some rough estimates of the costs of this hysteresis effect through a counterfactual simulation where the unemployed are matched to new jobs during the Great Recession and its aftermath just as easily as they were before the Great Recession. Without the pernicious effect of hysteresis, there could be over 12 million more employed Americans today.

Keywords: Unemployment, Great Depression, Beveridge Curve, Hysteresis

JEL Classification: N12, J60, E32

Suggested Citation

Mathy, Gabriel, Hysteresis and Persistent Long-Term Unemployment: Lessons from the Great Depression and World War 2 (March 6, 2015). Available at SSRN: https://ssrn.com/abstract=2574850 or http://dx.doi.org/10.2139/ssrn.2574850

Gabriel Mathy (Contact Author)

American University - Department of Economics ( email )

4400 Massachusetts Avenue, N.W.
Washington, DC 20016-8029
United States

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